Guernsey: Cyber Security – The Evolving Nature Of A Director's Duty

Mourant Ozannes Partner Robert Shephard, Senior
Associate Tina Asgarian and Associate Lauren McLeod discuss the
ever-more relevant issue of cyber risk and the role of directors in
making sure their business is secure for outside
threats.

Many companies that operate in Guernsey's financial sector
hold their most valuable assets in digital form. Threats to their
business are therefore evolving daily. This year, many businesses
have seen the re-emergence of "old school" IT attacks
such as ransomware, while others are experiencing (and telling
regulators about) new and innovative attacks. In some cases, there
have been reports of attackers destroying back-ups, leaving
companies with little choice but to pay up or lose their data.

As long as cyber-crime continues to pay, Guernsey's
financial sector will continue to be at risk. As the tools at the
disposal of cyber-criminals grow in sophistication, board members
at banks, fund firms and other financial institutions must change
their agenda to ensure that they understand and are able to deal
with the threats that face their organisations.

The risks for companies have been been the subject of many books
already, but the risk for directors who are struggling to get the
basics right is uncharted territory. This is worrisome because any
failure on their part to prepare properly for a cyber-attack by
following recommended guidelines might land them in personal
trouble with the law and with regulators.

The evolving jobs and obligations of executives and NEDs

The purpose of this article is to glace at the changing
landscape of directors' duties and the issues that directors
may have to consider before the gap between criminal capability and
a company's ability to defend itself becomes unbridgeable.

Let us first examine the main duties that every director has. In
Guernsey, duties owed by 'directors' apply to non-executive
directors, alternate directors, and shadow directors - in other
words, to any person occupying the position of director by whatever
name called. The substance of the duties carried out by the
individual are of sole importance here.

The director's relationship with his company (and indeed
this applies to anyone who discharges the function of a director,
regardless of whether he has the title of director) is primarily a
fiduciary relationship of trust. Directors owe a duty to act in the
best interests of the company and in good faith and honesty. If
they fail in these duties, they may incur personal liability.

In discharging their duties, directors should always consider
whether they are:

acting in the best interest of the
company and promoting its success;

exercising independent judgment;

exercising reasonable care, skill and
diligence; and

avoiding conflicts of interest.

Alongside these fundamental duties, directors should also be
mindful of their duties and obligations towards the regulator.

Over the next 18 months, the law relating to cyber-security and
data loss is going to change. Although the main obligations and
duties that a director owes to the company will not change, the
terms of reference are evolving as fast as cyber-threats are.
Cyber-security can no longer be seen as issue merely for IT
departments and a problem about which directors need not worry.
Many companies have employed a chief information officer (CIO) to
oversee the implementation of appropriate security measures or to
establish a committee to assess the risk and guard against
potential threats, but delegation without supervision or control
may not be enough to protect a director from personal liability.

Back to basics

In the aftermath of a cyberattack, the investigator will begin
by gauging the worth of the information risk management regime that
the directors have set up to protect the company. He might look
at:

the type of network security and the
frequency with which the company tests and monitors it;

anti-malware software;

staff training;

security policies, including home and
mobile working policies and access to removable data; and

the incident response plan that is in
place.

Most directors lack the skills and experience to assess their
companies' security risks themselves but the regulator expects
them to recruit appropriate talent, such as a CIO, to manage their
cyber-security risk. If directors merely delegate tasks down the
chain of command without keeping an eye on things and without
knowing where the company's weaknesses lie, or without knowing
the basics of 'good cyber-hygiene,' they could be held to
be failing to act with reasonable care, skill and diligence.

Every director has a continuing obligation to acquire and
maintain a good enough knowledge and understanding of the
company's business to be able to perform his directoral duties
properly. In the context of cyber-security, this does not require
him to know the underlying policies word-for-word, but he should be
aware of the information risk management system. He should also
know the strategies his firm has evolved and the reasoning behind
them.

Even though Guernsey is outside the UK, its directors ought to
look at HM Government's "10 steps to cyber-security."
These steps concern the protection of information as a board-level
responsibility; basic security controls to ward off the most common
cyber attacks; risk management regimes; secure configuration;
network security; privileges for users and how to manage them;
education and 'awareness' for users; incident management;
the prevention of malware; monitoring; removable media controls;
and home and mobile working.

Effective management ought to be coupled with good basic
controls and directors should test and question the resultant
policies. They should ask, where necessary, what "third-party
standards" they meet, find out whether anyone has tested the
safeguards to look for weaknesses and ensure that the systems and
protocols are acceptable for the company's insurance policy. A
director is better placed than the CIO or his team of information
experts to spot the areas of the business (perhaps data, money or
intellectual property) that are more likely to be exposed to an
attack and should therefore benefit from more protection.

Things that directors are good at

Although nobody expects them to be good at "tech
talk", directors ought to know how they are going to react to
an attack, whom they should inform and what actions to take. They
should also think about how the board is going to discuss
confidential, legal or litigation-related advice in board meetings
after the event. While doing this they ought to think about reports
prepared for the board that assess the company's exposure. All
this might add to the company's obligation to disclose
information to the regulators.

Other examples may include the need to review standard contracts
to see if the parties can rely on a data breach as grounds for
early 'termination' and the need to consider whether force
majeure clauses [which free the parties from liability or
obligation when an extraordinary event prevents them from
fulfilling their obligations] should be inserted into standard
contacts.

Directors ought to ensure that someone is monitoring the
company's insurance policies as a matter of routine; the
company must have adequate cover in the event of a cyber-attack.
Alongside the company's need for insurance, directors should
not disregard their own 'directors and officers'
('D&O') policies and related indemnities. As regulatory
investigations become more commonplace, directors would be
well-advised to check the level and extent of their cover to
include this.

These, then, are some examples of how a director's duty to
act in the best interest of his company is becoming more onerous.
He is not, however, expected to prepare for every eventuality. It
is unlikely that he will fail in his duties and obligations by a
mere error of judgement. However, if he fails to take reasonable
action and recognise that his duties extend to ensuring that his
company is as prepared as it can be for a cyber-attack (in view of
its size, resources and weaknesses) then he may be exposing himself
to personal liability, regulatory sanctions and, in an extreme
case, criminal liability for breaches under section 515 Guernsey
Companies Law.

The Guernsey Financial Services Commission

If the company is a licensed company, then directors will need
to be aware of their duties to the regulator. The GFSC is able to
take action if a director fails to discharge their regulatory
duties including issuing public statements, disqualification orders
and personal financial penalties. Recent public statements
demonstrate the seriousness with which the GFSC takes breaches and
the levels of fines that can be imposed on directors. In the event
of an inspection, directors should be prepared to demonstrate how
they have assessed the risks to the company, and the ways in which
this was monitored and controlled. Procedures and policies will
need to be carefully documented, periodically reviewed, and above
all directors will be expected to demonstrate that they have
effective oversight and control of the measures they have
implemented.

Developments in the law of data protection

Section 61 Data Protection (Guernsey) Law 2001 states
unequivocally that directors may be liable if an offence has been
committed with a director's consent or connivance or due to his
neglect, and that he may be punished accordingly.

On 25 May 2018, the European Union's General Data Protection
Regulation (GDPR) (Regulation (EU) 2016/679) will come into force
in the UK. This will impose severe penalties for non-compliance,
being the higher of 20 million euros or 4% of a company's
worldwide turnover. The States of Guernsey have voted to enshrine
the GDPR in island law with the implementation date set for May
2018. Compliance with the GDPR and other legislative changes which
affect the way in which data is stored and secured will rest with
each financial firm's board. Directors will be obliged to keep
an eye on legal developments and ensure that every system meets
their requirements. The board will also have to take a risk-based
approach to governance.

Although, as the recent case of Google v Vidal-Hall and others
[2015] EWCA Civ 311 demonstrates, it is not just the regulators
that companies need to be concerned about. A major data breach
involving a large number of data subjects could give rise to legal
action, even if they have suffered no financial loss.

Limiting the risk

Each business' risks, budgets and weaknesses differ from
those of the next. There is no one-size-fits-all solution to their
troubles. Whether a director has acted in breach of his duties to
his company ultimately depends on the facts of each individual
case; however, directors who act reasonably and pro-actively to
make their companies take technical and operational steps to
prevent and minimise the likelihood of cyber-attacks are bound to
have gone a long way to ensuring that they have discharged their
duties.

Directors might wish to take at least the following practical
steps.

Employ (or engage) a dedicated
cybersecurity expert who is qualified to brief and train the board
of directors regularly.

Formulate a robust cybersecurity
policy and do so carefully. Ensure that someone is monitoring and
reviewing it constantly. Make it part of the firm's
"corporate governance" regime and make a note every time
someone considers the policy and takes action.

Ensure that the company has adequate
insurance and that the board of directors understands the extent
and limits of the policy.

Set up contingency measures to take
during and after an attack and be prepared to respond to an attack
with a detailed plan that someone has tested.

An original version of this article was first published in Compliance
Matters, August 2017.

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